The US 'productivity miracle' will disappear if Fed doesn't cut rates: Strategist

the latest readings that we will get on inflation potentially giving us a bit more clarity on what the fed's next move could potentially be and what that timeline looks like for rate Cuts now this coming after the S&P 500 still continues to hold above that 5200 level not too far now from the all-time high the Dow having the best week of the year last week and we're now moving to the upside at the open up nearly 3/10 of a percent let's talk about what to expect we want to bring in Ben amens he is a new wedge wealth senior portfolio manager had a fixed income income and macro here Ben talk to us just about how much is really relying on the inflation print if at all and how you think the market will likely react if we do get any sort of hotter than expected print so I was looking at the actual estimates of the of the inflation number which is really narrow this time it's like 20 base points between the high and low of that estimate from economists and then I looked at the bomb market and they've priced it exactly to Perfection of what the headline cpis we expected to come out as then you have now casting of CPI 2 which is sort of like a real time measure that's also exactly line so if a price for Perfection on CPI then any type of S surprise on that number whether softer or harder could lead to significant movement in in interest rates particularly because previous segment I think was talk about we keep buzzing every day about this Ray cut and these inflation numbers OB matter a great deal to that because if this is a softer print than the previous three numbers the calculus again changes but if it's hotter the trend continues and so I do think we're going to see some volatility around this number if whether it's soft or or hot I don't know if it's going to be soft or hot that's a bit of a guess the market is sort of traida so there's not much signal that we're getting currently so we're just waiting here so you know at a certain point we can deal with Wednesday when we get to Wednesday I'm curious speaking of of what's happening in the bond market and sort of the action we've seen you know along the treasury curve over the last month and and really the way that price has perhaps LED some folks to think about how they're allocating across asset classes what's the state of play as we sit here mid 24 you still have you 5% on the 2-year still have plenty of opportunities to get something for nothing right if you want to talk about treasuries and cash what moves have you been making seen been discussing most often as it comes to those allocations which you know are are now we're a year into a state of play that people didn't think would last too long yeah the yield curve is actually being very flat and stable you know the difference between the two- year and the 10 year is something oscillating around NE 40 basis points so you're not getting much reward from being really far out to urve and as an investor I take note of that because the end of the day it's about risk taking in this case of like if I don't get enough yield for the duration risk so to speak I may have to do different things now I was talking to some of our clients and our our our advisors are firm about thinking of duration itself which is basically measuring the sensitivity of portfolio when interest rate changes you have to now think of diversifying the ration because we are in an environment as I just described if these data points keep throwing us off with volatility going one way or the other for interest rates then you want to play it more safer so let's say you want a duration of six years you can do that but you have to use different pieces of fixed income in that duration to get the six years but have a low volatility portfolio so what it comes down to is that you probably have to do more shorter maturity security at this point you not only get a better yield there but it gives you low volatility but then there's Emerging Markets there's preferred from that bank are issuing there's structured credit there's ABS those are all like Securities I think are attractive in this environment they've been positively returning and gives you low volatility for the same dire and you you mentioned Emerging Markets it made me think of um something else you brought up in your notes about milin last week and and it seemed like you know Rick Newman made this point in a column several other outlets made the point that everyone was cheering the US economy everyone was super excited about investing in America what do you make of that kind of consensus overweight to the US in the context of global Investments um there's a big story in the Ft over the weekend about will Europe ever catch up to the US economy and everyone's kind of contrarian I think signals are going off yeah it's a productivity miracle that we're dealing currently with or at least we're anticipating it with all this AI hype and you know and the money to spend on it um you know look we we have a stronger economy because I think really that in the early days of the Pandemic part of the country just reopened without having any kind of you know um acceptance of the pandemic being there so to speak I think that was we that matter today even and all the say the the Sun Belt states and then we got the stimulus not just the spending stimulus but the infrastructure Act and the inflation reduction act that sound political but it does have a real impact on the economy currently that's actually driving the productivity to an extent I think this is why people are looking at the US of this difference of growth versus Europe that does not have as much productivity growth currently and the lawmakers in in Europe are concerned the productivity growth is too slow and I think this is why people like the us but to sustain it this was the other you know big theme at at the milkin conference like everybody wants a rate cut because if we don't cut rates at some point then we cool off the economy too much and that productivity Miracle may disappear so I think the enthusiasm for the US will remain and it will remain well into the election after that we'll we'll see but I I do think it's yeah it's the outperforming economy then speaking of enthusiasm let's talk about the mem stock move that we're seeing here this morning because miles and I were talking about this massive run up that we've seen in GameStop a lot of it on the heels of this tweet that we got out from R keny over the weekend but I'm curious from your perspective this hype this Mania that we're starting to see resurface here with some of these meme trades is it going to play out differently this time is some of this do you think have maybe a bit more St baying power than what we saw a few years ago well on the one hand the meme stocks were always interesting about the reopening of the economy like that that company you mentioned I mean the fact that malls went open everybody could go back into a GameStop store and it allowed GameStop actually to have access to Capital markets and have capital and then invest in his business and recover that was part of that initial meme stock and then it became speculative and everybody jumping on it I think this latest move I guess it's again enthusiasm of taking risk and some level of speculation as we're sitting here sort of a low volatility environment waiting for any kind of signal from the fed or the election or the economy and it drives people to potentially trading again so I'm not surprised right in a way this is one company you get a bunch of other of those are they investable stocks I think you need to do your homework on the companies in in by itself would I I would advise when an analyst on it but I think broadly speaking that if we will always be part of our markets now you know people have learned to trade this enthusiasm about taking option Trading on and you know all these retail brokerage firms offer that right in order to to trade options and people look at as an income generating too so I think that's part of what's playing out there uh you know as we enter the fifth year since the pandemic started to sit here with 5% rates and talk about a low volatility environment um it's really amazing how far we've come it feels like we're back in 1920 you know pre- pandemic to some extent um benan is always a great conversation New Edge wealth senior portfolio manager thanks for stopping by

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Length: 7min 27sec (447 seconds)

Published: Mon May 13 2024